This paper describes a model in which monetary shocks have persistent real effects. Starting from the limited participation model of Christiano (1991) with capital adjustment costs as suggested by Dow (1995) it is confirmed that costs of equipment installation and restrictions on consumer portfolio choices alone cannot account for the observed effects of monetary policy. However, after introducing nominal wage contracts as a third friction, the model generates real effects of monetary shocks. It is shown that these real effects are highly persistent for a realistic size of adjustment costs and strongly autocorrelated money growth shocks which are typical for Europe.}
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Find related papers by JEL classification: D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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